1.

What is Hotelling Model and give an example for this situation Hotelling Model is a model, proposed by Harold Hotelling of the effect of competition on locational decisions. For example, two ice-cream vendors, A and C, on a mile of beach. Assumed that the cost and choice of ice-cream is the same for each distributor. Buyers are evenly distributed along the beach and cutomer will buy from the closest vendors. Suppose that initially the vendors locate at points A and C in the illustration below. These locations would minimize the average traveling costs of the buyers and would result in each vendor getting one half of the business. However, this solution would not be an equilibrium. If vendor A moved from point A to point B, he would keep all customers to his left, and get some of C customers and will increase his market share. For similar reasons, C would move toward the center, and in equilibrium, both vendors would locate together in the middle. This analogy indicates that locational decisions are not made independently but are influenced by the actions of others.

Point B

Vendor A

Vendor C

2. In the Hotelling Location Model, if there are 2 vendors, what is the pure strategy nash? what about 3 vendors? Hotelling Location model is a straight line model where vendors can move freely at anytime. When there are two vendors they would pick the middle as well to reach nash equilibrium. This is because the two vendors can control both sides. There will be no nash equilibrium if there is 3 or more vendor. This is because who ever is in the between the two vendors will want to move out and go to the edge this is because they have the least amount of customers. This will continue to happen forever. When the two vendors finally reach the ends the third vendor can move anywhere along the strip and will still be worse off at any point compared to the vendors at the edge. Therefore there is no nash equilibrium if there are 3 more vendors in a hotelling Model.